This is part 1 of a 3 part series on emergency funds. See the end of the post for the other parts.
I don’t like motivating people with fear. I prefer to use the carrot rather than the stick when I work with folks. Get them moving towards things they’re excited about - freedom, being their own boss, peace of mind, sleeping well at night - that sort of thing.
But in order to get you to set up an emergency fund (now, not next week and certainly not “someday”), I need to put a little shake in your boots.
In my conversations with people over the years, I’ve learned another scary thing: what many people consider unexpected expenses are actually expected but forgotten. Which means that “renewing the car registration” or “the holidays” could feel like an emergency - one that you are ill-prepared to cover.
What’s the solution?
You need an emergency fund. Especially if you’re in debt. Let’s dive in.
What is an emergency fund?
An emergency fund is just a name for a savings account that acts as insurance. It’s sole purpose is to protect you from getting wiped out by the unexpected. When something happens, you lean on your emergency fund and get back to your life - unlike what happens now (did someone say tailspin?)
An emergency fund is not a vacation savings account, it’s not a retirement account, and it’s not an investment account. And no, an overdraft protection line of credit at your bank is not an emergency fund. That’s more like a payday loan.
Why do I need an emergency fund?
Life is, at its core, unexpected.
This is a wonderful thing! At least when it comes to things like an unexpected rainbow brightening up the sky after a shower, or not knowing when a baby’s first steps will be, or getting to see an old friend out of the blue. It’s so much less wonderful when it comes to your finances.
We all want our finances to be stable things. We act like they are. We set a budget: “This is how much we make, this is how much our bills are...there! That’s how much we have left over. Budget over.”
Sorry, I just can’t stop laughing.
On what planet is that how your life goes?
Having an emergency fund allows your life to feel stable and steady, even when it’s not. This leads to things like breathing easier, making decisions based on facts instead of feelings, and having actually productive conversations with your partner about money.
Again, if you’re in debt (particularly credit card debt), you especially need an emergency fund.
If you’re in debt, you’ve probably googled “savings or debt?” at least a half dozen times while Trying To Get It Together. Consider this debate closed - you need both, but you need (some) savings first. Having some savings will allow you to get out of debt and stay out of debt, which is a critical piece that people often struggle with.
Who needs an emergency fund?
While I firmly believe everyone needs at least some money set aside for emergencies, the following groups should treat not having one as, well, an emergency!
Folks with credit card debt
People with variable incomes
People employed by someone else (job security is dead, you can thank the gig economy for at least part of that)
So who does that leave? I guess if you’re retired, you might have less need for an emergency fund. Or if you’re a child. Though - my daughter has a savings account (outside her college savings account). She’s 15 months old. Start ‘em young!
Check out the other posts in this series to learn about how much you should save, where to put it, how to know when to use it, and then the big one: how to save it up.